Is Changed Form Contract Signed A Binding Agreement Or Counteroffer?
Written by: Alan Nochumson
Most residential real estate transactions in Pennsylvania are entered into by way of the form documents created by the Pennsylvania Association of Realtors.
What usually happens is the interested buyer forwards a completed form agreement of sale to the seller as an offer. The seller then has three options: reject the offer outright; accept the offer; or make a counteroffer.
Many times, the seller makes small changes to the form itself. These changes can be the result of the interested buyer failing to complete a portion of the form accidently or because the seller seeks to alter a term of the offer. Either way, the buyer, if agreeable, should formally ratify any changes made to the form by the seller.
In Richter v. Pfundt, at the summary judgment motion stage of litigation, the U.S. District Court for the Eastern District of Pennsylvania recently confronted the issue of what constitutes a binding agreement as opposed to a counteroffer when changes are made to such a form agreement and are thereafter ratified in writing by the buyer’s representative but not the buyer himself.
In the summer of 2008, approximately 40 acres of land was listed for sale in Upper Makefield, Bucks County, Pennsylvania by Nelson G. Pfundt, according to the opinion. After negotiations, according to the opinion, Irvin E. Richter signed a standard form agreement of sale in an attempt to purchase the land. Under the agreement of sale, Richter tendered a deposit of $350,000.
In the agreement of sale, Richter left blank the zoning classification of the subject property, the maximum cost for which Richter would be responsible to correct any defects disclosed in any inspection report before giving him the option to void the agreement, and the structures located on the property which would be excluded from a termite inspection.
Before Pfundt signed the agreement, his attorney reviewed it and completed the sections left blank by Richter, as noted in the opinion.
In addition to inserting the zoning classification into the agreement itself, the attorney completed the sections related to the cost of correcting defects that might be disclosed in inspection reports and the limited scope of the termite inspection. The attorney changed the agreement so that Richter would be forced to accept the property and proceed to closing should the total cost to correct any conditions discovered by an inspection fell below $3,000.
Moreover, the attorney inserted the words “in main house only” in the blank for excluded structures, thus limiting Pfundt’s responsibility for damage caused by termite infestation, as noted in the opinion.
Pfundt’s real estate agent retyped the attorney’s hand-written notes and forwarded pages containing the additions to Richter’s associate, James Millspaugh. After Millspaugh initialed each of the changes in Richter’s name, Pfundt executed the agreement of sale thereafter, the opinion noted.
After the real estate transaction failed to close, Richter requested that the security deposit be returned to him. When that did not happen, Richter filed suit against Pfundt, amongst others.
They both eventually filed summary judgment motions against the other.
The federal district court first addressed whether the sales agreement constituted a binding contract between the parties.
In Pennsylvania, “the essential elements of a contract are an offer, acceptance, and consideration or a mutual meeting of the minds. An acceptance must be unconditional. It is not valid if it materially alters the terms of the offer. A purported acceptance that materially changes the terms of an offer is a counteroffer that must be accepted by the party who made the initial offer before a contract can be formed.”
The federal district court pointed out that, “[i]f the changes were immaterial, there was a contract”, however, “[i]f the changes were material, there was no contract unless Richter accepted Pfundt’s counteroffer” and “[i]f the modifications created a counteroffer, the question then becomes whether Millspaugh had authority to accept the counteroffer on Richter’s behalf” and “[i]f he did not, there is no contract.”
Richter argued that the form agreement he initially presented to Pfundt for acceptance was materially changed when Pfundt inserted additional language in the form, thus making the altered document into a counteroffer.
In response thereto, Pfundt contended that the insertions were mere “cleaning up” and contemplated by the parties and, regardless, even if the changes were material, Millspaugh had Richter’s authority to accept them and Richter ratified Millspaugh’s initialing of the changes by proceeding with the necessary preparations for closing.
The federal district court concluded that the inclusion by Pfundt of the zoning classification of the property was not material to the formation of the contract. According to the opinion, Richter acknowledged that he was aware of the proper classification at the time he signed the form agreement and should be forbidden from now claiming that Pfundt altered the zoning classification that they both had contemplated.
In contrast, the federal district court believed that other changes could be construed as material to the intended real estate transaction.
According to the opinion, Pfundt modified the form agreement by increasing Richter’s potential liability for correcting conditions on the property and by limiting Richter’s protection from termite damage to the main house and excluding other structures from inspection which significantly increased Richter’s risk in that there was a barn and other buildings on the property.
The federal district court believed that “[w]hether the revisions were material and whether they represented a complete expression of the parties’ agreement are questions of fact that must be resolved by a jury.” In reaching its conclusion, the federal district court noted that “[t]he factfinder could reasonably decide that potentially increasing Richter’s risk for repairs by $3,000 in a $3,500,000 deal was or was not material” and “the jury could conclude that insect damage to buildings, that may or may not have been a part of Richter’s plans for the property, was or was not material.”
The federal district court then determined whether, even if the changes were material, “Millspaugh’s affixing Richter’s initials approving the changes constituted an acceptance of the counteroffer.”
In doing so, the federal district court discussed whether Millspaugh had the authority to execute Pfundt’s counteroffer in the first place.
Richter had testified during the discovery phase of litigation that he did not give Millspaugh authority to initial the agreement on his behalf. Contradicting Richter, Pfundt presented evidence, specifically the testimony of Millspaugh that showed that Richter had authorized Millspaugh to sign the form agreement for him.
The federal district court thus acknowledged that “[w]hether Richter gave Millspaugh the authority to act on his behalf is a factual dispute for the jury to resolve.”
Regardless, Richter argued that he should be entitled to judgment as a matter of law with respect to Millspaugh’s authority because the Doctrine of the Statute of Frauds requires that an agent’s authority to execute a contract for the sale of land must be in writing and Pfundt failed to produce any writing that gave Millspaugh such authority.
“In Pennsylvania, an agreement for the sale of land ‘cannot be specifically enforced unless it is in writing signed by the parties to be charged or their agents thereunto lawfully authorized by writing.’ The fundamental purpose of the rule is to prevent fraudulent and perjurious assertions of oral agreements.”
The federal district court dismissed Richter’s reliance upon the Doctrine of the Statute of Frauds. In doing so, the federal district court stated that the requirement that an agent’s authority be in writing applies only to agents of the seller of land and thus does not mandate written authority for an agent to act on behalf of the buyer of real estate.
With that said, the federal district court held that Richter, as the intended buyer of Pfundt’s property, could not invoke the Doctrine of the Statute of Frauds to abrogate Millspaugh’s authority.
The federal court’s ruling in Richter highlights the importance of dotting all of your “i’s” and crossing all of your “t’s” when signing a form sales agreement.
In order to avoid the situation faced by the buyer in Richter, when presenting an offer, a buyer should specifically warn the seller and his agent that any and all changes to the offer will be considered a counteroffer which must be approved by the buyer himself in writing and not through the buyer’s agent or others. Although such precautionary measures may seem onerous and extreme and could slow down the execution of the sales agreement, by doing so, the buyer and seller are protected.
Reprinted with permission from the January 29, 2010 edition of The Legal Intelligencer © 2010 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.